Depreciation expense is the systematic accounting charge recognising the allocation of a tangible or intangible fixed asset's cost over its estimated useful life. It is a non-cash charge — it reduces reported net income without impacting operating cash flows — which explains its add-back in EBITDA and free cash flow calculations. In business valuation, depreciation plays a key role in the DCF model: it reduces the taxable base (tax shield), must be distinguished from the economic maintenance capex it represents, and feeds directly into the calculation of normalised free cash flow.

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Example: a Swiss industrial SME charges CHF 1.2 million of depreciation on production equipment (10-year life, CHF 12.0 million gross book value). In the DCF model, this depreciation is added back to EBIT to derive EBITDA, then deducted after tax to arrive at free cash flow — alongside a maintenance capex of CHF 900,000 reflecting the actual annual renewal investment required to sustain productive capacity.

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Hectelion carefully decomposes depreciation charges to distinguish accounting amortisation from the actual economic maintenance capex in valuation models.